When readers of my 12% Letter took their position in October 2006, Westshore sported an 11% dividend. Once the world caught on to the story, investors “chased the yield,” making Westshore behave like a growth stock. That pick returned 80% in the first 18 months.

Today I’m going to show you why Westshore was the perfect income play… and how you can spot the market’s best income investments. Let’s get started…

To qualify as a perfect income play, a company must 1) run a simple business, 2) be unable to expand its operation, 3) enjoy a huge “moat,” and 4) pay very little (if any) taxes. Here’s how Westshore measured up:

First, Westshore’s business couldn’t be simpler. The railroad brings the coal to Westshore’s Vancouver terminal. Westshore removes the coal from railroad hoppers, piles it up using a system of conveyor belts, and then reloads this coal onto ships. Westshore never owns the coal. It simply earns commissions from the coalmine it serves.

Simplicity is important because it’s easy to identify the risks in a simple business. All businesses carry risk, but if you can identify them, you can make a more accurate assessment of a company’s value.

Would you rather make a bid on a vast corporation with myriad operations and opaque accounting – say, Citigroup – or a coal terminal like Westshore? I always give more value to dividends from simple businesses than from complicated businesses.

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Second, Westshore has no way to expand its business. The terminal sits on the head of a spit in the waters south of Vancouver. The railroad tracks run around the perimeter of the spit. Westshore piles up the coal in the center of the spit. There are two docks, a pair of gantry cranes, a parking lot… and just enough room for a couple of prefabricated cabins where management runs the operation.

It may sound odd to say we’re looking for companies that can’t expand, since most investors are drawn to growth. But we’re not looking for growth. We’re looking for income. Expansion is a distraction… and often a big waste of money.

Businesses that can’t expand have the most focused management teams and pay the safest dividends. We want a company that pumps cash into its dividend, not its capital-expense budget.

Third, Westshore has a huge business moat, meaning there are significant barriers to competition. Westshore exports metallurgical coal. Forges use “met coal” to make steel. There is no substitute for Westshore’s coal. The world will always need steel… And the coalmine has enough coal to last for another century. A couple of other terminals export coal from western Canada. But they’re too small to make any dent in Westshore’s revenues.

We want a business that enjoys a wide moat. Moats protect castles from invaders. In business, moats protect dividends.

Finally, Westshore is an income trust. As long as these companies pay out all their earnings to shareholders, they don’t have to pay tax. Companies that don’t pay tax have more money to return to shareholders.

Of course, our Westshore position was a victim of its own success. The share price appreciated so much, its yield diminished and a modest price correction triggered our stop loss… As much as I love Westshore’s business, it’s still too expensive to leap back into today.

But you can find similar opportunities. Look for simple, straightforward businesses that pay few taxes, enjoy a healthy competitive advantage, and are unlikely to spend their money on anything but your dividends.

Good investing,

Tom

P.S. Westshore Terminals was my first pick in The 12% Letter, and it’s my best-performing so far.

Source: The Perfect Income Investment

But as we know, Asian economies are now booming and they need metals and minerals to fuel that growth. Where better to go for that than Africa, with its vast unexploited mineral resources. China has seen the golden light, but now it seems that India, too, has the continent in frame. Better still, some African governments are actively courting Indian business to invest.

A bid for Indian investment materialised at a recent three-day India-Africa business summit in New Delhi which attracted no less than 500 delegates from 30 African countries! There Tarun Das, chief mentor of the Confederation of Indian industry (CII), said they will open four new offices in different regions of Africa to help.

Since the likes of Namibia, Zambia, Mozambique, Democratic Republic of Congo and Ghana are among the countries trying to lure Indian investment that is no surprise. Even troubled Zimbabwe can see the potential. (The Zimbabwean government, new or old, is hardly in a position to turn down any investment!).

Competition is healthy

Competition for China in Africa has to be a good thing. China now has $10bn invested in Africa. It has been sewing up deals with African governments to secure the continent’s vast mineral wealth. And it has done this by giving loans to cash-strapped governments. Something that hasn’t exactly gone down well with international mining companies, who are worried they are losing their grip on the continent!

But what about India? Is this Africa’s new sleeping dragon? After all, it too has started extending loans to Africa – India now has $1.37bn now invested in the continent.

Continues below

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More transparency please…and less red tape

But Africa wants India to do more than simply exploit mineral resources. India, Mr Mutati said, could speed industrialisation, improve infrastructure and strengthen regional cooperation. The Indians have much sought after and cost-effective technology and could supply equipment to the mining industry to process raw materials.

For example, India and Namibia (which produces 6% of the world’s diamonds) are currently looking at setting up a training facility to polish and cut diamonds. Jewellery designing is also on the cards, said India ’s Minister of State for Commerce, Jairam Ramesh. The objective is to cut out the middle man. You can see why. India is the world’s biggest importer of uncut stones. It is also the biggest exporter of cut and polished diamonds!

The Indians should also continue to invest in training. Africa should take advantage of this, said Bwabwa Wa Keyembe, Congo’s director general of the National Agency for Promotion of Investments.

By playing its Africanisation cards right, India would, in return, have access to the world’s biggest untapped resources. Mussa Uthman, the deputy director of investment promotion centre in Mozambique, promised “big reserves of diamonds, copper and nickel which could be viably exploited”.

That is certainly true! Mozambique has considerable mineral resources including gold, gemstones, titanium, coal and bauxite. And to date these remain buried.

To some extent India is already proving its commitment. India ’s Tata Steel has already made a foray into Mozambique. One of the things it has done is to build a 120 MW plant to supply power to the mining industry in Zambia. Good news for other miners considering a future in Zambia!

So India and Africa – a match made in heaven? Well not quite. Aside from the political risk, there is also plenty of red tape to cut through. Obtaining licences is not exactly easy, nor is getting a visa. Africa needs to be more transparent in this respect but Zambia’s Mr Mutati seems confident that they can and will make things easier! There are already moves to simplify procedures.

The new silk road?

The dean of the African diplomatic corps, for example, is considering a multiple visa system with embassies in New Delhi. And Mozambique is already negotiating a “uni-visa” system. If that materialises, a visa to South Africa could allow an investor to travel elsewhere too.

So how does the private investor gain exposure in Africa? Investing in something like the little-known New Star Hidden Value Fund or the Vanguard Precious Metals and Mining Fund are two lesser known options. Then there are other more popular funds like Merrill Lynch’s Gold & General.

But, surprise, surprise, Erin wants to remind me to be careful with African selection! Famine, disease, war, corruption – some countries are pretty risky. Of course she is right, but consider this. In US dollar terms, over the past three years almost all African indices outperformed the S&P 500. Stars were the Mauritius All Share Index rose 75% and Nigeria’s All Share Index, which doubled. Those are just two examples.

The Chinese have seen the golden light. Now the Indians look set to bask in it too.

So keep mining, but cautiously,

Erin and Isabel

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